Business is the asset of every businessman and businesswoman, and the assets of the business are the fixed assets and inventory. At the start of business studies, most students are confused about fixed assets and inventories.
In actual business, there are clear differences in both of the terminologies. Here are the definitions and the differences between inventories and fixed assets.
Assets have two big types in the business world, fixed assets and current assets. Fixed assets are assets that cannot easily convert into cash. It is used for more than more years.
Fixed assets can be tangible and intangible. Fixed tangible assets are those assets that are touchable and seeable easily, like building, furniture, etc. The non-tangible fixed assets are those which cannot be touched, like brand and trademark.
Fixed assets can also be defined as assets that can and cannot work in day-to-day business activities. The items included in the fixed assets are buildings, machines, cars and trucks, furniture, etc.
Inventory is also called stock which holds in business to sale in the one-year period. Inventory is the current asset because it is expected to convert into cash within a year.
There is a different type of Inventories in different business. The raw material is the inventory of the manufacturing company. Work in progress is also included in the inventory.
Finished goods in stock and different components purchased for supplies are the parts of inventory or the inventories themselves. Too little inventory is also not good because you will lose profit when demand is high and don’t have inventory or stock.
Inventory targets the profits of the company. The higher the inventory, the higher will be the profit. Inventory can manage the cash flow too because it is easily converted into cash.
Fixed assets Vs Inventories
Few comparisons differentiate inventories and fixed assets.
- Period of Time
Fixed assets are for a long time, while inventory is for a short time. Because keeping inventory for a long period of time is risky and not profitable.
- Items and Types of fixed assists and inventories
Fixed Assets and inventories have different items and types. Fixed assets are tangible and non-tangible assets that can be touched or untouched like machinery, cars, trucks, buildings, brand, trademark, etc., while inventories are totally different. Inventories are the goods in stock ready for sale, and they can be raw materials or the supplies used for goods.
- Risk Factor
Risk is an important factor in business. Risk is always increasing when keeping inventory for a long period of time or more than one year. Because it is important to sell out all the stock in the years and make new and fresh inventories. Hence, fixed assets are not profitable when it is kept for less than a year. Fixed assets like buildings, machinery are mostly used for the whole life of the same business.
Depreciation is the most important part of the fixed assets. Fixed assets are depreciated on an annual basis. The cost of deprecation is also calculated in every business. Buildings, machinery, cars, and other fixed assets except land are depreciated annually. Hence, inventory is not depreciated, and it also does not have any depreciation cost.